New Self-Storage Facilities Have a Mixed-Use Component
Self-storage industry development has seen a shift in recent years from building from the ground up to more conversions. As more cities are being built out and fewer pieces of land for commercial use remain, cities are also looking for ways to increase their sales tax base.
This might be bad news for self-storage developers, since facilities rely on rent rather than retail sales. Or, it could mean good news for developers who are willing to agree to mixed-use developments.
“Mixed use makes sense for zoning approvals; it helps sell a project,” says David Fulton, CEO of SSG Development in Boston, Mass., whose company has several mixed-use developments. “Mixed use is the new sexy term.”
Creating mixed-use developments may mean adding office and/or retail space to a project. It isn’t just catching on in the United States. Earlier this year, Lambert Smith Hampton submitted plans in Glasgow, Scotland, for a mixed-use development that would have a Starbucks drive-thru with a StorageVault Self Storage facility.
Projects In The U.S.
When Drew Bowlds, a real estate developer with Bowlds Development Co. in Sammamish, Wash., approached the city of DuPont about a self-storage facility he wanted to build on the last piece of 1.3 acres of vacant land in the middle of downtown, he was met with the same skepticism about the industry, as are many developers. Bowlds knew the site would be prime for self-storage. As well, there was only one other facility within a five-mile radius.
“I saw the property and one broker told me it wouldn’t work, the city wouldn’t do it, even if it was mixed use,” says Bowlds. “The site just really wouldn’t work for retail like they wanted. I went to the city and they told me ‘no’.”
Bowlds, who has been developing self-storage since 2005, persisted. “I told them I know the perception of self-storage and what I build caters to the business community.” Bowlds then met with the planning committee, who also denied the project at first. “There was no zoning for self-storage and the city really wanted a grocery store or a hardware store,” says Bowlds. Although the city had even offered the land with no success to a grocer for free until the company hit performance goals, Bowlds tried again. “We went to several grocery stores and they didn’t want to do it, but when we approached Ace Hardware and ran the numbers by them, they were for it.”
The problem for drawing retailers in DuPont is the same problem many cities are facing. The land costs are too high to make it feasible for retailers such as hardware stores, which don’t carry a lot of high producing ROI inventory to make it worth their while. Bowlds proposed a project that would allow Ace to pay 50 percent of market rent (with a percentage rent clause). Bowlds notes that the rent Ace will be paying provides some ancillary income on the property in addition to the storage. “Even at one half of retail market rent, my ROI will be similar to what I’d be getting if that space was all storage,” says Bowlds. “It is going to cost a little more to build, but the ROI is going to be very good.”
The city was sold on the project, but it had to go through public hearings, which were harsh on the idea of self-storage. “The public was tough; you would have thought I wanted to bring in an X-rated movie theater by some of the comments,” says Bowlds. “The city really wanted Ace, though, and we got through it by addressing all of the concerns.”
The project is still in the permitting process, but the city changed the zoning, adding a new mixed use for a combination of storage and retail. The proposed $7 million project will include a three-story indoor self-storage facility (no RV or boat parking is allowed) and a combination of office and retail space will be on the first floor. The Ace Hardware will be approximately 10,000 square feet; the total of the project is proposed 92,545 square feet.
Bowlds, whose properties are branded and managed as West Coast Self-Storage, states that this is the first mixed-use property he’s developed. “We’ve been working on this for over a year and we just closed last month,” adds Bowlds. “The bottom line is that we gave the city what they wanted; they weren’t going to get a grocery or a hardware store without this type of a deal. The people get their hardware store, the city gets the sales tax revenue, and we get our self-storage.” The project should break ground in October.
Bowlds says he sees mixed-use development as the future of self-storage. “Some cities are already requiring mixed use for all new self-storage development,” he notes. “We did it because we needed to in order to get a great location.”
Fulton says the mayor of Boston isn’t a proponent of self-storage, but when SSG Development proposed an $80 million mixed-used project in the area of Jamaica Plain, they received approval. “We had to do mixed use, it was the only way to get it through,” says Fulton.
The 3.5-acre site will include a stand-alone self-storage facility. What makes this development so unique is that it will also include 88 multi-family residential units with 25,000 square feet of prime retail on the first floor. The final phase will include another 44 multi-family residential units. Fulton claims the site will resemble a small-town atmosphere. “I think these types of developments will continue; it goes back to how people want to live, work, and play in the same area,” Fulton says.
Fulton, who has been involved with a variety of mixed-use projects on the East Coast, adds that, ideally, he would seek storage only sites, but those are becoming harder to find. “If we aren’t developing for mixed use, land prices are getting so high that we have to sometimes subdivide the property to create land value,” says Fulton.
One such site is in Woburn, Mass., where the self-storage facility sits next to a tire store. The land for the tire store was subdivided off. Although you may not think a tire store would be compatible to self-storage, Fulton says it is actually a great store to have next door. “We saw it as a great opportunity; it brought all kinds of people to the store and also built awareness for the storage facility,” Fulton says.
Acquiring Facilities With Office/Retail Space
If you’re not into developing new facilities and want to find facilities that are already mixed use, you might find one. Ray McRae, vice president of Storage Solutions in Chandler, Ariz., states that his company currently manages two such facilities. The retail and office space was already on the site. “All of the retail and office product that we manage is currently 100 percent leased out, and we have very little problem filling vacant space,” says McRae. “However, it is all driven by demand. If the demand goes away or there is a downturn in the market and these types of small businesses go under like in the last Great Recession, you will see vacancy rise.”
M. Anne Ballard, president of marketing, training, and development for Universal Storage Group in Atlanta, Ga., mentions that her company has dealt with several facilities with retail shops and some that have incorporated former storage units into incubator offices. “Some states don’t allow that, so make sure to check,” says Ballard.
McRae cautions that if you’re going to enter into these types of arrangements with businesses, make sure to consult with your attorney to draft a commercial lease that applies to the tenant landlord act of the state you are in. “In our case, we use a commercial modified gross lease on the spaces,” says McRae. “These spaces are typically rented on a yearly basis, with escalators in rent for each renewal year.”
Fulton’s company also developed another facility in Massachusetts that includes an on-site café. He notes that it’s very important to vet the business operators and their financials to make sure the proposed business will bring people in as well as be a stable presence in the community.
The Bottom Line
While certainly not all new development will be a good fit for mixed use or existing development good for conversion to mixed use, this seems to be the trend, especially in urban markets where cities are looking for new sales tax revenue and ways to draw more people to their communities.
In addition to mixed use being required by some cities now, many in the industry are saying mixed use just makes sense. “I think mixed use makes great sense,” says Ballard. “The more traffic you bring to your site, the more business in rental and box sales.”
Kerri Fivecoat-Campbell is a freelance journalist based in the Ozark Mountains. She is a regular contributor to MiniCo’s publications. Her business articles have also appeared in Entrepreneur, Aol.com, MSN.com, and The Kansas City Star.